Looking to wrest control from the bulls, natural gas futures bears received just the fundamental news they needed Thursday morning as the Energy Information Administration reported that 52 Bcf was injected into U.S. gas storage facilities for the week ended Aug. 12. While not overtly bearish, the number was above most industry estimates, including the ICAP-Nymex storage options auction's projection of a 49.5 Bcf injection.
As a result, September natural gas continued its downward momentum from Wednesday, dropping an additional 17 cents in the minute following the report's 10:30 a.m. EDT release to notch a $9.05 trade. Later in the afternoon, the prompt month broke below $9 to record a low of $8.85 before going on to settle at $8.928, down a whopping 46.3 cents.
"The natural gas market finished near its lows and with some downward momentum intact with which to challenge the $8.475-8.87 congestion zone from early August," said Tim Evans of IFR Energy Services. "As with the petroleum side, we don't see the short-term fundamental outlook as favoring a return to the highs. We are 100% short September natural gas from $9.34, with a protective buy stop at $9.44 to limit our risk on the trade."
What a difference a week can make. Over the past two days, September natural gas dropped 82.4 cents from its high settle of $9.752 on Tuesday. The storage report was seen as helping to coax futures off of its lofty perch.
"[Thursday's] number was more than people expected, but it was lower than the last year and the five-year average," said Ed Kennedy of Commercial Brokerage Corp. in Miami. "This is no big deal because we are still running ahead of the five-year average."
Working gas in storage now stands at 2,515 Bcf, according to EIA estimates. The surplus over last year's inventory has finally been erased. Stocks are now 4 Bcf less than at the same time last year, but still 140 Bcf above the five-year average of 2,375 Bcf.
The broker noted that next week's storage report should be interesting. "The thing that was so bullish earlier this week was the cash market, and the gas wasn't for electrical generation as temperatures moderated in most regions of the country. This time of year, natural gas only goes into electrical generation or storage. Watch out, next week's number could be a doozie and I think that will end this ridiculous statement that we are going to have trouble refilling storage."
Kennedy along with his Commercial Brokerage partner, Tom Saal, will be sharing some of their market reading expertise at one of their workshop sessions December 7-8 at the New York Mercantile Exchange. Joining them will be long time floor trader and market-mover Sandy "Trot" Goldfarb, who will share how he views the gas futures market in both the short- and long-run.
Volatility in the natural gas futures market continues to grow, as evidenced by the fact that $1.06 separates last Friday's $9.91 high for September and Thursday's low of $8.85. "Any commodity futures market as it runs up, increases its futures volatility, which is different than implied volatility," Kennedy said. "It just comes with the territory. That is why NYMEX increased the margins...because the daily swings are getting wider and wider."
Kennedy noted that natural gas futures are really at a crossroads here because there are some "very bearish" signals out there. "On the daily chart, we left an island of four days of trading sitting above us at $9.38 on up, which is very bearish unless that gap gets closed right away," he said.
However, he warned that technicians might be a little reluctant to be aggressive on the sell side right now due to storm activity on the horizon. "Probably by Friday afternoon, we are going to have three tropical systems to talk about. One that is currently northeast of Puerto Rico, one in the central Caribbean that is gaining strength and a system that is still on the continent of Africa that is expected to be a monster once it hits water. That may put the bears on the sideline.
"If it sounds like there are two sides to this price structure, well, welcome to August in the natural gas industry," Kennedy said. "Volatility is going to be the name of the game folks, so get used to it."
For more information on the futures workshop in December, visit http://gasmart.com/workshop/.
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